United States

M&A activity in the information technology industry remains strong

2Q 2015 Information Technology Industry Spotlight


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The information technology (IT) sector is often synonymous with the venture capital (VC) industry, or, more broadly, with innovation. Technology startups are heralded in headlines and aim for explosive growth with the help of future-oriented VC investments. While that is a valid way of perceiving the U.S. tech industry, it's an incomplete one. A large portion of the IT industry is focused on predictability and historical past performance. Many of those companies are ensconced in the middle market, particularly in the private equity (PE) middle market.

For investors in the middle market today, customer retention and acquisition are key to growth. Customer retention is an important, historical metric that is often indicative of future growth. Beyond customer retention, IT companies are also focused on revenue recognition and the capitalization of costs. As companies grow and expand, they're often finding their internal structures to be inadequate.

M&A activity in the IT industry remained strong in the first quarter, tallying about $30 billion worth of deals through 361 transactions. The industry remains a seller's market. Exclusivity is being granted later in the process, which may be stunting M&A activity to some extent, as buyers hold back until exclusivity is given. In this environment, buyers are being asked to make a leap of faith on some of these deals, because there's only so much diligence you can do with limited access to the numbers and management.


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